Economic growth in Mexico presents new opportunities

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Although it's a long way from becoming the next China, the growth of the Mexico economy and the manufacturing activity in the region have global companies and investors taking a close look at San Diego's neighbor to the south.

Four years ago, according to a report from T. Rowe Price, Mexico was dealing with a series of troubling conditions: a drug war, widespread poverty and political corruption that led the U.S. government to suggest the country was at risk of becoming a “failed economy.” However, things have changed significantly.

“Mexico's recent success started with a flurry of free-trade deals it signed," the report cites. "Partly as a result of these deals, an increasing number of multinationals have set up shop in the country to capitalize on its inexpensive labor and proximity to the United States."

Although it took some time, it appears Mexico has been the biggest winner from the North American Free Trade Agreement over Canada and the United States, and over the years expanded to include other countries. Mexico now has 12 free-trade agreements involving 44 countries.

The manufacturing expansion in Mexico has benefited from conditions in China, where the labor cost equation is moving in Mexico's favor.

“In 2000, Mexican factory workers earned more than four times as much as Chinese workers. Due in large part to China's double-digit wage increases in recent years, by 2010, Mexican workers earned only 1.5 times as much,” said Michelle Gibley, director of international research at the Schwab Center for Financial Research.

And the Boston Consulting Group estimates by 2015 the fully loaded cost of hiring Chinese workers may be 25 percent more than hiring Mexico workers.

Another factor favoring Mexico is “near-shoring,” manufacturing products to be exported to regional neighbors, in particular, the United States.

“Near-shoring has helped Mexico's manufacturing sector, helping to grow the country's market share in goods that are expensive to ship because of their bulk or weight, such as televisions, major household appliances and automobiles. Furthermore, we expect U.S. demand for cars to remain strong,” said Schwab's Gibley.

One product, medical devices, has become a big part of the manufacturing activity in Tijuana. Ossur, a global leader in orthopedic products based in Iceland, established a manufacturing facility in Tijuana and has announced plans to significantly expand the operation.

According to the Tijuana Economic Development Corporation, more than 40 medical device companies have operations in the city, hiring more than 31,000 workers, claiming “more manufacturing workers than any other city in North America.”

After years of discussing the geographical links between San Diego and Tijuana, a concerted effort is under way to pool resources to seize the opportunity for international trade.

“San Diego and Tijuana are naturally positioned as a hub for global business, travel and idea sharing," said Mark Cafferty, CEO and president of the San Diego Economic Development Corporation. "There really is no place like this in the world from a business development perspective, and I think you're going to see more businesses locate and expand here because of all that's available to them on both sides of the border.”

To take this to the next step, a partnership between six economic development organizations on both sides of the border is being established. The Cali Baja Bi-National Mega-Region, also known as CaliBaja, “is designed to step up our collective economic development profile by coordinating our marketing and communications around CaliBaja as a pre-eminent place for high-value business investments. With the recent trend toward near-shoring, this makes Baja a much more valuable player,” said Christina Luhn, executive director of the mega-region initiative.

The opportunities in Mexico have not been ignored by Wall Street. The Mexico Fund, a closed-end mutual fund investing in companies based in the region, has participated in the recent rally. The shares had dropped as low as $11 in February 2009, the depths of the recession. In trading last week the shares had more than tripled to more than $38.